The Import Demand for U.s. Burley Tobacco in European Markets

One of the chief complaints against the federal importer of burley tobacco. Italy, Greece, South tobacco program is that it sets prices too high Korea, and almost every other burley exporting relative to foreign tobaccos: most foreign burley country import substantial amounts of burley. tobaccos are priced between one-third and oneThese foreign exporters typically import large half the price of U.S. burley. Critics feel that if amounts of American burley tobacco. the government program were changed so that These apparent contradictions, which have burley production could increase, prices would some countries importing and exporting large be lower, and more burley tobacco would be amounts of burley at the same time, exist beconsumed. Production increases could bring cause the quality of U.S. burley is substantially about two beneficial effects. First, U.S. burley higher than that of any other burley. Apparently, tobacco would be more competitive in overseas American-blend cigarettes must contain a certain markets, and, therefore, exports could increase. amount of high quality burley in order to assure Second, U.S. imports of foreign burley could dethe desired smoking characteristics. Thus, Amercrease. This study examines the validity of the ican burley commands a substantially higher first argument; its main objective is to evaluate price than foreign burley, and the U.S. can be the the elasticity of demand for U.S. burley tobacco leading burley exporter, as well as a significant in European markets. Of course, the more price importer. elastic is the demand for U.S. burley in these Therefore, the great differences between the European markets, the more exports will expand prices of U.S. and foreign burleys could be toif U.S. prices are lowered. Evidence is also protally the result of quality differences. However, vided on the growth potential of these foreign this does not preclude some substitution between markets. U.S. and foreign burleys. As long as this possibilThe United States has seen substantial erosion ity exists, the total demand for the American of its share of world burley trade since the late product could be very price responsive. 1960s. The U.S. accounted for 49 percent of In order for total revenue of U.S. burley proworld burley exports in 1965, but it has acducers to increase from additional production counted for only about 27 percent of world ex(therefore reducing the price), the elasticity of ports since 1975 (USDA, Foreign Agricultural demand for burley tobacco must be greater than Circular). However, the volume of its exports unity in absolute value. Other studies (Mann; has doubled since 1965. Therefore, the erosion of Reed) have found that the demand for burley tothe U.S. market share has come from an increase bacco in the domestic market is inelastic. Therein exports from other countries, rather than a fore, other things equal, the only way that an decrease in U.S. exports. increase in the quota can increase revenue to Imports of burley tobacco by the United States producers is if the export demand elasticity for have been increasing steadily. From 1960-69, U.S. burley is elastic enough to offset this loss of flue-cured and burley imports totaled 4,936 metrevenue in the domestic market. ric tons, compared to this country's production Previous studies on the market for burley toduring that period of approximately 8.2 billion bacco have concentrated on our domestic market metric tons: imports accounted for less than .01 (Mann; Sutton). The only study that examines percent of total production for the United States. the impact of the U.S. burley price on U.S. exDuring 1977-79, we imported 19,969 metric tons ports of burley is by Reed. Reed used an equaof burley alone, while producing 760,049 metric tion in his block recursive model to explain extons. Imports during this more recent period ports of burley and found that exports were price were about 2.6 percent of U.S. production responsive; however, he found that the demand (USDA, Foreign Agricultural Circular and Tofor U.S. exports was inelastic. bacco Situation); in recent years, this country Capel's study on exports of flue-cured tobacco has been one of the leading burley importers. is the only attempt at studying the demand for The U.S. is not the only large exporter and any type of tobacco on a national basis. He used